John Fialka
John Fialka
War By Other Means:  Economic Espionage in America
ISBN: 0393040143
War By Other Means: Economic Espionage in America
Mr. Fialka talked about his new book, War By Other Means: Economic Espionage in America, published by W.W. Norton and Company. He recounts many real-world spy stories and warns U.S. industry about the risks of economic espionage. He talks about security and the theft of patents and software by electronic means.
TRANSCRIPT
War By Other Means: Economic Espionage in America
Program Air Date: March 19, 1997

BRIAN LAMB, HOST: John Fialka, author of "War by Other Means," who was Robert Cabot Lowell--I'm sorry, Francis Cabot Lowell?
DAVID HACKETT FISCHER, AUTHOR, " PAUL REVERE'S RIDE": Francis Cabot Lowell was the founder of Lowell, Massachusetts, and that's how we think of him, but he was actually our first industrial spy. He went over to England and, at a time of great secrecy in England, around 1812, 1818, he managed to take away one of their most valuable secrets, which was a--a water-driven loom which replaced thousands of people with water power. It was a machine that creates literally acres of cheap cloth, and he--he memorized it. They had a kind of arrogance in those days in England wh--which was that Americans were OK because they were usually stupid and it's OK to show them your machinery because they'd never get it. It's so complex.

And he walked in; he got it. They must have realized something was wrong because they searched his luggage three or four times. There's nothing in there. So he went back to Boston, he rented a storefront, he made a model of the machine that worked, all from--apparently, from his head, and then built the first major US industry, which is New England Textiles, and made a bloody fortune.
LAMB: And where did you find this story?
Mr. FIALKA: The story--an engineer told me just a sort of a little glimpse of the story one day, and I d--dug it out of the Library of Congress and out of Harvard University. Wha--what's interesting about Lowell is, our sense of spies is kind of violated by the story. We think of flashy people like James Bond, who are surrounded by blondes and continually attract attention to themselves. Here's a man whose whole method of being was not to attract attention to himself. He never told anybody how he did it. He was a--a--a--a very quiet man and he--he didn't even leave a picture of himself until one day, a workman in his office found a silhouette of him hidden behind a picture frame.

And it got me to thinking about economic spies and the spies that we think of. Economic espionage goes on all the time. It--because it never stops, there's no time--right time to write a book about it because people who are busy spying don't write memoirs. Plus, it's a--it's a crime that makes money. And so if you're an economic spy, there's always an opportunity for another heist. And so you--you see very little written about it.

And finally, the victims, especially if they're big corporations, are not likely to want anything written about their side of it because they have to go to their board of directors and say, `Well, I'm sorry, the French'--or the Japanese or the Chinese--`have just stolen our most valuable secret.' They'd rather simply shut up and take their hit and go on. So we--we don't have ma--much in the way of records of this activity.
LAMB: When did you get interested in doing a book about this?
Mr. FIALKA: Well, about two, three years ago, I guess. The--the Ames case came up, and a lot of us who--who covered intelligence at the time--I covered it for The Wall Street Journal--got very interested in writing about Ames, although none of us really understood much about the Ames case until it began to unfold many months later.

But I talked to a--a--a R--former Russian KGB official who said, `Ah, Ames--this is old hat. This is old espionage.' He said, `The new game, economic espionage, is what we are all turning to. That is the future.' And it was something I--I'd heard very little about and I got quite curious. And the more I looked at the Ames case, there were 10--you know, 10 people writing books about it and there weren't any books on economic espionage that--that I could see, so I decided to write one.
LAMB: Who was Farewell?
Mr. FIALKA: Farewell was an interesting man. He was the--the Russian equivalent of Rick Ames. His name was Vladimir Vetrov and he had a checkered history in the KGB. He was like Ames, something of a bumbler; like Ames, something of a womanizer; and like Ames, he had a fondness for the bottle. And these are dangerous activities for a spy.

And somewhere along his checkered career, he wrecked a car in Paris, and a nice man stepped out and said, `Oh, that's too bad. Let me fix it for you. There will be no questions asked and I'll pay for it out of my own wallet.' And those of us wh--who are interested in this man's career decided that was when the French captured Vetrov as a mole.

And what's interesting about Vetrov and the KGB was that their main activity in the United States was economic espionage. They were stealing secrets, some people estimate, of a value of $1.4 billion a year from our universities, from our companies. There is a period when secrets be--are--are open before they're closed. Usually when they're in the university, you can get access to them, and then where--they're--when they're applied to a weapon, they become secret. Well, that was the weak point that the KGB was exploiting.

And so V--Vetrov was a member of that unit, which was called Line X in the KGB, and he knew a great deal about what they'd taken from us during the height of the Cold War. In--in essence, we were financing their weapon systems because they were simply taking our secrets and sometimes getting them to the field in the form of a weapon faster than we could with the original. And when you think about it, all the hardships in the laboratories, the blind alleys, were all avoided because they could simply take it, replicate it, field it.

The French called in their debt and got Vetrov, whose case was code named Farewell in French, to give them literally planeloads of information, tons of documents on what was being stolen from the West. At the last count, it was something like 5,000 Russian weapon systems a year that came out of our R&D either directly from the US or through our allies in Europe or especially through Japan, which tended to collect a lot of that stuff and had no counterintelligence at all. So in many cases, i--it was easier to--to steal it there.

Vetrov came to a bad end. He--his drinking and womanizing led to a homicide in--in Moscow in 1982, where he--his mistress said, `Vladimir, I don't understand it. I don't know where you get all this money, but you're living way beyond your pay scale in the KGB. How does this happen?' And he--they were in a car, and he began hitting her with a champagne bottle. And then a bystander came up and rapped on the window of his little car; said `What is going on in there?' She'd been screaming.
LAMB: This is in Moscow?
Mr. FIALKA: This is in Moscow--in the hills outside of Moscow. And Vetrov got up, pulled a hunting knife out of the backseat of the car and killed the man on the spot and then ran into the woods. Well, a short while later, after reflecting on what he'd just done, came back out of the woods, put up his hands and said, `I did it and, oh, by the way, I'm a KGB colonel.'

So they arrested him--it was a terrible embarrassment--put him in jail for manslaughter, and that supposedly was the end of it. But it wasn't the end of it, because the French mole had suddenly gone silent. All of these secrets the West had been getting were now at risk because the West now knew who all--all--who all these agents were who were taking all their secrets. Question was: Do they risk the mole? Or do they start ran--rounding up the agents because--before they do more damage?

And after about a half-year's silence, that's what they did. And then the Russians began seeing their agents disappear all over the world, and they finally put two and two together and pulled Vetrov out of--out of the prison, interrogated him and shot him. And--but it was--it was...
LAMB: So he's dead?
Mr. FIALKA: We believe he's dead. It was the end of a period that probably showed our greatest vulnerability in economic espionage in--pecu--in pecu--in our own peculiar fashion, it was so embarrassing to the CIA and other agencies that most of this story is still covered up.
LAMB: Make the connection, though, between the United States and Mitterrand, who was the president of France, and Farewell. H--I mean, they di--they played a role in--in the relationship between this country and...
Mr. FIALKA: Oh, yes. In--in 1981, Mitterrand, having won an election with heavy support from the Communists, had--had to--to do something dramatic to--to--to gain the friendship of Ronald Reagan, which he desperately wanted to have. And so he pulled Reagan aside up in Canada and said, `Oh, by the way, you might want to know, we have this case called Farewell and I'll be sending you some documents.'

Well, when the documents arrived here, the Reagan NSC realized that the family jewels, at least a lot of them, had been stolen over a period of years and it was time to begin locking the doors.
LAMB: Now how did they do it, though? How did--how did Vetrov--did he ever come to this country?
Mr. FIALKA: Vetrov was never in--in the US that I know of. He certainly was in Canada. But how do you do it is interesting. Wh--in the Ames case, we were reading about Ames carrying paper bags full of things out of--out of the agency at CIA headquarters in Langley. That's exactly the technique he used in the KGB headquarters, which is in the hills of Moscow. He--he simply walked out with bags full and there was no security. And he--French had a difficult problem in figuring out how to--because their equivalent of the CIA was penetrated thoroughly by KGB spies. They couldn't use that to run their--their prize mole, Vetrov. And so they used an army--an army captain who was not on anybody's intelligence chart.

And the army captain added another layer--layer of secrecy by getting his wife to meet with Vetrov. And so the wife would drive up on a busy Moscow street in a car and Vetrov would pile in and unload bags full of things in the backseat. And sometimes this was risky because he brought in live artillery shells, which were copied from US rounds, and they would rattle around on the floor of the car. But all in all, it was a great operation.
LAMB: Wait. Let me read this. `Eventually, US security people began to catch on. In 1983, a delegation of Soviet scientists invited to tour a Grumman aircraft plant on Long Island were told they could carry no cameras and take no notes. Still, by putting adhesive tape on their shoes, the scientists were able to collect slivers of metal alloys being used for new US fighter planes.'
Mr. FIALKA: There's a great deal of ingenuity applied to this because it is--it--you know, we are re--reared in this country to re--to think that crime does not pay. This kind of ci--crime does pay because you--by the use of a--a little ingenuity, you can steal the secrets for a weapon system or a--a business system. And sometimes they--the--the technology is the same. It's called dual-use technology.

You can steal the secrets for something that costs, say, $2 billion for a $100,000 bribe or putting magnets on your feet or tape on your feet and--and getting evidence of it or by using a huge v--variety of electronic espionage, such as bugging or wiretapping, mu--much more cheaply. And you avoid all the mess of having to discover something in a laboratory; you can just steal it.
LAMB: Th--this comes up throughout your entire book, where you write about all these different countries and their electronic and economic espionage. `Equipment from General Electric, Boeing, Lockheed, Rockwell International and McDonnell Douglas made up the top of Line X's shopping list while MIT, Harvard, the University of Michigan, California Institute of Technology and Princeton were the Soviet scientists' favorite hunting grounds for ideas.'
Mr. FIALKA: We have...
LAMB: Universities.
Mr. FIALKA: We have a--and--and we take pride in it, and rightfully so--a degree of intellectual openness in this country that is simply stunning to other areas of the world. I mean--and Americans take it for granted. Asians in particular see it as a huge bonanza for taking other people's ideas and either replicating them or--or making them even better.

But we are almost unconscious of the loss. And i--in this case, this was the stage where secrets are--new technology pops up in academic papers in the open. And then later on, when there's--somebody in the Pentagon said, `Oh, that's great. We'll make a missile guidance system out of that,' then it becomes secret.

But if the agent has been in the university, one way or another, and these universities are quite open and professors like to talk about their ideas, then the--the secret is stolen bec--before it becomes a secret. And we discovered as--as the aftermath to Farewell, our huge vulnerability there. And it remains, because our university system is very loathe to change that.
LAMB: In chapter 10, this line. `Japan's bugs are becoming part of the American way of life.'
Mr. FIALKA: Japan some time--maybe 20, 30 years ago--obtained a--a model of a CIA-designed bug that was simple and--well, they made it simple and reliable. They sort of fashioned it into what amounts to the--the VW bug of bugs. It was simple, cheap and reliable. And they standardized it and they began to produce it in--in large quantities. And it runs on certain frequencies that they chose and it made it simple for what I call in the book Little Brother to operate.

You know, we--a--as--as sort of people who grew up in the Cold War, we--we often think about George Orwell's book and Big Brother and how big government is always eavesdropping on us. Well, i--i--J--the Japanese brought a revolution to the field in that they put a very high technology bug that can--i--in some cases, can be fit into a fountain pen, out so that private investigators, your business competitor, your wife who's in the middle of a divorce suit, can simply bug you. And you'll be much less the wiser, because most Americans assume that somehow, we're immune from that.
LAMB: As someone who's stayed in this hotel, when I visited Japan, right across the street from the American Embassy, this quote was a little bit surprising from Clyde Prestel--Presteritz--Prestowitz, who is--by--what--what's he do?
Mr. FIALKA: He was head of the--the--the US--he was the Japanese expert for the US trade representatives office at the time this occurred. He was in trade negotiations there.
LAMB: The--here's what he says about the Ocura Hotel. `Nobody in their right mind would make a serious telephone call from the Ocura.'
Mr. FIALKA: Hotels loom large in the whole history of--of economic espionage. There is a way to wire a telephone so that when you hang it up, it stays live so it functions as a microphone in your room. In fact, people I know who've--who've been in Asia claim that there are entire hotels that are simply live--live microphones. Everywhere you go, the phones act as a mic when they're hung up.

In this case, the Japanese always put our trade representatives in the same floor of the same hotel, the Ocura in--in Japan. And through--through hard lessons of life, they began to realize that anything you said on those phones would go to the Japanese first because they were thoroughly bugged.

And so I believe Prestowitz used to do his--you have to talk about negotiations a lot--I mean, among your--your allies before you go to the other side and say, `Well, how about this?' And so you sort of bat it around. And he--he chose to go to a--a big public park where there's a lot of noise, where he was somehow sure they couldn't bug that, and he would discuss it there.

Other--others of our trade representatives would go to a crowded bar, where there's so much noise, they figured nobody could filter it out and--and do it there. It is second nature to people involved in second trade neg--in--in--in sensitive trade negotiations. But somehow, whenever it comes up in the press, everybody throws up their hands and they're--they're shocked. It's like the old Humphrey Bogart movie--I mean, they just couldn't believe somebody would do that; yet, they're all victims of it.
LAMB: Well, you--you know, they--a lot of Americans stay at that hotel. It's right across the street from the embassy.
Mr. FIALKA: Well, yeah.
LAMB: Do they ha--do they have any sense that they ought to warn people when they're staying there that they're being listened to or are they being--do you know if they're still being listened to?
Mr. FIALKA: They have--it's--when--parts of this--it's--you never know. But, yes, they--they regularly tell people that that's a likely possibility in this hotel and that most of the pros know it. It's--it's a--innocents like us journalists and ev--everybody else in the world who will walk in there and think, `Well, gee, this doesn't happen to me in the United States; it won't happen here.' We--we think we carry this around with us. Well, we don't.
LAMB: In the same chapter, you have the Russians listening to telephone conversations by picking it up off microwave.
Mr. FIALKA: Well, this was a shock to me. I--you think of the higher the technology, the more modern the communications system, the more private it will be. Well, that's just dead wrong. Cell phones, as we just learned from Newt Gingrich's experience, are highly vulnerable, and microwave transmissions are--are even worse because of something that the engineers call spillover. If you aim a beam at--and--and most telephone companies now use microwaves for long-distance transmission, and it's simply a beam of information that's aimed at a dish. And what we're not told about this is that a lot of it doesn't hit the dish; it sort of spills out in all directions.

And in the case of a beam on--on--at one point on the Earth going to another, the error may be several thousand feet. And so if you hold up another dish, you catch the spillover; you get the message. When you beam down from space, as is the case with many satellite communications, the spillover can be 5,000 miles wide. That's the footprint. And so anything in that footprint, if it knows what to pull down from that satellite, can just hang a dish out and bring it down. As--as I point out in the book, that appears to be the answer for why the Russians still have a listening station in Cuba, which they call `low ears' in their code. They pay $200 million a year for this listening post.

And the question is: While their economy is faltering, why do they keep coming up with this money? And the answer is because they probably make something like $1 billion a year eavesdropping on the spillover from our communications. Cuba's in the footprint. It's in the downlink. And by using sophisticated gear, they're--they're hearing a lot of phone calls between US businessmen that we assume are private.
LAMB: You have a footnote in chapter 13--or, source note, `Transparency International, a Berlin-based group dedicated to curbing corruption in international business transactions, ranks 41 countries on a corruption index based on polls, reports of businesspeople and business journalists. With a possible score of 10, China scored'--2.6, `2.16, ranking it just above Indonesia, which is in last place.' What's that mean?
Mr. FIALKA: Well, this gets to--to bribery, which is another way that you can steal someone's secret or steal someone's business deal. And in China, for a very long time--centuries--it has been an art form. And the French also use bribery to a fare-thee-well. Americans--businessmen dealing abroad a largely prohibited from doing it by the US Foreign Corrupt Practices Act. And so we--like many things, we think it's not there, but it is.

And our--our overseas businessmen see it all the time. But places where it's just endemic, it's in the fabric of life, are places like China. And Transparency International is trying to make people aware of this. But it's another case of the victimless crime. If bribery--if bribery has been used against you, as a US company, chances are you will never know it. You'll just know that you lost the contract. Unless there's been eavesdropping or some other piece of information that you get, you don't know it's there.
LAMB: Now if you were running an American business and you got a telephone call from someone, from other land saying they want to come visit, they want to come get involved with your business, they want to come be an intern, whatever it is, rank the--name the countries that you would be worried about the most.
Mr. FIALKA: Well, the list begins with Japan. Ja--Japan doesn't have a--a CIA equivalent. In one US government document I read, the--the--the country's businesses sort of function collectively as a kind of CIA. They--they swap information with each other. These--these fiercely competitive conglomerates that we think of as slugging it out with each other actually compare notes, especially when it involved a competitor like the US.

And so they habitually pick up information over here. A lot of it's simply open and legal; some of it isn't, but they're--they're collectors. And they have a leg up on us because they come over here knowing our culture, knowing our language. We go over there; it's innocence abroad, not knowing or not caring about their culture and not--not knowing their--their language. And so they have a huge ability to--to pick up things while they're over here, and we have a--something bordering between an inability and an unconsciousness when we go over there.

So it's--it's an uneven contest. And I guess in the--in the concluding chapter of the book, I--I--there really are two alternatives. Either you--you close this society up, like it used to be in Lowell's time and put tariff--a wall of tariffs up and--and not let foreigners come in, which I find just highly unlikely, or we have to learn how to deal in this atmosphere and how to actually get as much as we give away. When--when--when we have foreign students or foreign interns here, it's a--it's a two-way street and we just have to be prepared to drive on it, and that means we have to change our culture.
LAMB: You say in 1990 there were 29,840 Japanese students attending US universities. Meanwhile, 1,485 American students were studying in Japan.
Mr. FIALKA: Yeah. I mean, these are--i--if this was warfare, this would be called an exchange ratio. And the enemy has, in the case of Japan, 10,000 guns and we have 10. Well, Americans would never stand for that. If it was a basketball game and they came out with 12 players on the floor and we only had one, that would be considered unfair and un-American.

But in this case, they really care about coming over here and getting information, and we--we really don't care about going over there. And what's interesting is, it kind of turns our whole history on its head because in the early days o--of our industrialization, we cared a great deal. And in--our whole history comes out of Lowell's escapades. In other companies, it simply went around Europe and--and--and collected the best technology and came over here and tinkered with it.

And as--as things globalize, we're either going to have to learn how to do that again or continuing--continuing to face a loss of technology, a loss of high-paid blue-collar jobs and a kind of hollowing out of our economy.
LAMB: Someplace--I--I'm looking for the statistic--you said something like 51 percent of all Ph.D.s are, in this country, given to Pacific Rim foreign students.
Mr. FIALKA: That's right. Of the advanced engineering degrees in this country, 51 percent now go to--to students--foreign students with the great majority of them coming from the two Chinas.
LAMB: And you say we pay for it?
Mr. FIALKA: Well, in the case of the Chinas, we do, in a peculiar way, because those students are the brightest from a society of a billion people. And when you think about it, those people are really smart. And when they come over here and compete for scholarships against us, they usually win. They get the--they get the professor--professor teaching assistantships at universities. They get to run the experiments in the laboratories. They get the valuable mentor time from our best minds, and--and they benefit from it.

And it used to be--the theory was that this was great because they're coming over here, they're joining the American melting pot and they're staying here and they're contributing to the American dream. Well, as somebody discovered recently, this is, i--in--in large part, a dream because by checking Social Security numbers, we can see that now half of them are going back after a few years sojourn in our universities and in our high-tech companies. And often, they go back to form competitors to our business. And basically, it's the same story that Farewell told: We're being beaten with our own ideas.
LAMB: China, you say, floods the United States with 15,000 students a year. Is that People's Republic or is that Taiwan?
Mr. FIALKA: I believe it's the two Chinas. It's both of them together. And they both represent the same problem because they're fierce competitors and they value our information highly.
LAMB: Who's Ben Wu?
Mr. FIALKA: Ben Wu is an example of a sleeper. He's a--a young student--actually, he was a professor from the People's Republic of China who was not quite among the elite capable of coming over here because his language was just a--his English was just a--a skosh below the testing level. And so he couldn't come over here on his own right. And then he ran afoul of--of Tiananmen Square. He was giving pro-Western speeches when he shouldn't have been. And they interrogated him and they threatened him with lost of job--loss of livelihood and--and they threatened him with harm to his family. Except there was one way he could get out of it, which is to come over here and to be a sleeper, a spy who stays here for a long period of time, who in--gets into the American society and then begins divulging economic secrets to China and who--who will follow him and always be with him, they told him. And in the course of which, he can make a great deal of money, because China's MSS, which is the name for their CIA equivalent--and it's--it's kind of a copy of the CIA.

The way they do it is, they--they flood the United States with a lot of spies, maybe as many as 1,000 at a time, and they allow them to sell what they collect back to China at a markup. And so they're--they're kind of entrepreneur spies, if you will, and he was one of those and he got caught at it.
LAMB: Where?
Mr. FIALKA: Well, he was--it's an interesting story. He was caught in Norfolk, Virginia, as either a double agent or a triple agent because the FBI, which is having great problems following large numbers of young, highly educated Chinese around the US, had met him and assigned an agent to Ben Wu and had arranged him to be an informant of theirs, which makes him a double agent. It was a--a deal that he found to be fine because they set him up with an office and a fax machine and they gave him a front company and a little money.

But then he proceeded to do deals which they didn't know about and got himself arrested by the US Customs Service, who didn't know about the--the FBI link. And among many other things, the case makes you wonder whether the Customs Service and FBI talked to each other about this subject.
LAMB: Where is he today?
Mr. FIALKA: He's in federal prison in--in Pennsylvania. He had a choice. This--his arrest and the--the charges against him were so embarrassing to the FBI that they gave him the opportunity to go home, but he knew that if he went home he would be shot, and so he insisted on a trial down in Norfolk. And he was tried and convicted. And during the course of the trial, the Chinese came to him and--and just warned him if he did any of this, they would get him. And so now he's at a place where they can't get him; he's in a US penitentiary in--in Pennsylvania.
LAMB: Wh--what kind of damage did he do to the United States, or United States business?
Mr. FIALKA: Wu was probably not one of their best examples, but that's--that's how come we know so little about this business. We catch the--the ones who are slow of foot or who are not catching on very well. And he had a--he had a conscience problem with stealing things. He eventually overcame it with a--the offer of a $500,000 profit to take US night vision equipment from a Texas company and ship it to China, which was against the law, which is what he was convicted for. But it was the lure of $500,000 that kind of s--sucked him into it. But he hadn't really--I mean, sleepers are supposed to go for 10, 20, 30 years until they really become, you know, sourced into our economy. And the--the--the Chinese who assigned him over there--over here had him making friends with senators and even the president so they would have pipelines into where they wanted them. But fortunately, this sleeper didn't get a chance to sleep for very long before the customs people caught him.
LAMB: You call him a little fish.
Mr. FIALKA: He calls himself a little fish because the--the theory of their espionage is that you flood a competitor with little fish, and like little fish, some of them will die; some of them will find something; some of them will survive. And he was just a little fish.
LAMB: Your next chapter is Big Fish.
Mr. FIALKA: Big fish is the--the fl--flip side of it. What they can't take over here with their little fish, they'll sometimes get huge US corporations to give them. And the case I use is McDonnell Douglas and computer-driven lathes, which are a product of US Air Force research during the Cold War, which are used to make the B--B-1 bomber cruise missile bodies--very complicated, high-tech missiles. And--and these machines were sought after by the Chinese.

And the lure to a big fish or a big US company is, `Look, this is a huge market. It's a billion--it's--it's a billion people over here, and they need telephones, airplanes, cars, beer, Coca-Cola, and if you get into this market and do well, you will double and triple the size of your market share and beggar your competitor. Wouldn't you like to do that, Mr. US company?' And the answer, invariably, is, `Yes.' You know, `What does it take?' And often what it takes is their technology, because it--it goes over there, they replicate it and, pretty soon, they're selling against the US company, whatever it is. And it's a lesson that never seems to sink in because there's always a big fish out there smelling the bait. They see this huge market, and they don't realize that these are very smart and savvy people who want to take the idea but not the hardware.
LAMB: You, at one point, say that China has hidden two-thirds of its defense budget.
Mr. FIALKA: Yeah. Their--like many other aspects of their culture, especially to a country that doesn't study other people's cultures, they are able to hide a lot of what they spend on their military in all sorts of things, including commercial ventures. In fact, a lot of their conver--commercial ventures--big companies--come right out of the People's Liberation Army. And I make the case in there at some point where if your Aunt Minnie goes into a Wal-Mart and buys a venetian blind, she may well be making a down payment on a new Chinese submarine. These are business-making ventures, and their for-profit businesses are rearming their military.
LAMB: `China is investing in weapon systems that would bring it up to superpower level in several categories, including new jet fighters and submarines from Russia.' You just--you make that statement without any parentheses or, you know, quote marks. As you walk this story around through this city, what were--what was the official government's reaction as you talked it over?
Mr. FIALKA: Most people who--who worry about military strategy worry about the next arms race being in Asia, between Japan and China, primarily, but also the little tigers Taiwan, South Korea, or also worry about a China that is--that is--that bec--becomes an economic might as well as a military might. I mean, they're already under the shadow of China's missiles. China is a nuclear power and has missiles that can reach some of these countries. And we know that a lot of their effort is devoted to making these missiles more accurate. And the, you know, arms companies are already sensing that this is where the big money is. These countries are eventually going to have to rearm and rearm quickly, and it's only a matter of time. We are the peacekeeper in that part of the world right now, but if this--you know, if this--this scenario begins to unfold, I think you'll see a very scary time over there.
LAMB: What's the whole story about the McDonnell plant in Columbus, Plant 85?
Mr. FIALKA: Plant 85 was the plant where McDonnell Douglas told the workers, `Yes, OK, the Chinese came through the plant the other day. They were videotaping some of these high-tech machines that you're using to build the C-17, America's military transport of the future. But don't worry, your jobs are secure and we're never, ever going to sell them these machines.' Well, one thing led to another; the big fish got the hook in its mouth and, lo and behold, the Chinese demanded the machines as part of a multibillion-dollar deal to sell China US aircraft.

And McDonnell Douglas agreed to--under certain circumstances, to let these machines be used for their manufacture, only the machines began turning up in places in China that they weren't supposed to be turning up in. It's a case that still--as I'm told, is still in front of grand juries in the United States, and I don't know how it will come out. But these machines were once considered among our crown jewels in terms of making weapons.
LAMB: You say that--you have a whole scenario here where 30 Chinese workers in blue jumpsuits moved into this plant and crated up all these machines and 275 trucks pulled up and--and unlo--you know, they loaded them up and--What?--took them back to China?
Mr. FIALKA: Yes, there was some--there was some concern over whether this deal might get called back, and so the Chinese--while it was still OK, the Chinese moved in and loaded the stuff up and shipped it abroad before we could say, `Wait a minute. We want to take a look at this.' And so the machines were over there by the time the questions were asked. And this is not an unusual scenario.

The Chinese are among the prime bargain hunters at--when there's an auction at a US arms plant, when--when we're selling the dies and the tools that made the weapons that we used during the Cold War, the Chinese are often the--the most eager buyers, and they bargain hard. They get technology that some American scientists say, `Well, that isn't the high-tech now; it was the high-tech then.' Well, the high tech then is good enough for them. They're eager to pull into the 1970s and the 1980s to get their military system in--system functioning at--at that level of high-tech. They don't necessarily need the latest thing. And the old stuff here is going, in many cases, for a song, and they're singing.
LAMB: There's a trade imbalance in favor of the Chinese to the--America of fif--$35, $40--yeah.
Mr. FIALKA: Thirty--$30 billion, something like that.
LAMB: When all that money leaves the United States for the goods that the Chinese bring into this country, does it go right into the government? I mean, the government own all these products over there?
Mr. FIALKA: It's--it's like a Chinese puzzle. Some of it goes into the government. A lot of it goes into these--these commercial endeavors that I was talking about, the Chinese military factories that now make everything from teddy bears to venetian blinds to so-called sporting rifles, which is simply a copy of a north Chinese infanty ri--in--infantry rifle. Almost any appliance--small appliance you can think of, they make. I mean, you can just go into a--a big US discounter and look in--look underneath whatever it is--the toaster, the hammer, the automobile jack--and if it comes from a strange company like Polytechnology, you're talking about the Chinese military.
LAMB: Who's Don Sparrow?
Mr. FIALKA: Don Sparrow is an example of an American who saw this early on and wouldn't let go. A lot of American companies went to Japan in the early '60s and were given a kind of a Draconian deal, which is, `Yes, we like your product, Mr. Sparrow. It's very ingenious. But before you can sell it over here, you're going to have to give us all the rights to it. And then it's fine. You can sell as many as you want.'

And a lot of--thousands of American companies cut deals like this because the Japanese--we viewed the Japanese then the way the English viewed Americans at the time of Mr. Lowell. These people, the Japanese, were reviewed in the '60s as great imitators. They made cigarette lighters. They made great copies of--cheap copies of American goods that often broke down. And so what was the harm of giving them our television technology or giving them the rights to this or that?

And Herb--Herb Sparrow, who had a little microwave lamp that dried paint, said, `No, this is my idea. I invented it. I've got my whole life sunk into this. I'm not going to do it.' And he proceeded to wage about a 10-year war with Mitsubishi, which got fought all over the place--in the US Senate, in Washington, lobbying back and forth. And eventually, he lost his company. It was bought out by other people in the company and then--who then made peace with Mitsubishi. And we don't know how the story ends, but we think that--that at least, to some extent, he lost control over his idea, not to mention his company.
LAMB: But in the course of this chapter--Senator Bob Packwood...
Mr. FIALKA: Yes.
LAMB: ...James Lake, Steve Saunders all pop up in this chapter, and--and you--you talk about the intricacy of Washington and lobbyists and foreign governments and all that. Explain, what--what should we worry about here?
Mr. FIALKA: Well, again, it's a--it's a mismatch between the two countries. I mean, we like to think of Japan as an ally, and in--in some cases, Japan has been a val--valued ally. But there's a huge mismatch between the way our politics work. And in the--in the case of Japan, the kind of lobbying we see here in Washington simply doesn't happen. It's a very insider- oriented society, and an outsider can't come in and hire a bunch of lobbyists and work his will on Congress.

Japan--Tokyo simply does not work like that. These are sort of good-old-boy associations that go way back, and they're closed, for all intents and purposes, to Americans, even if we tried, which we don't. But they try hard, and they can come over and, in this case, they assembled what was known as Mitsubishi's team in Washington, which con--cons--consisted of some very high-powered lobbyists, many who just left government, who were able to get Senator Packwood enlisted because he owed one of them a favor.
LAMB: Which one?
Mr. FIALKA: He owed a lobbyist...
LAMB: Steve Saunders?
Mr. FIALKA: ...yes--a favor because Steve Saunders did favors for him. Steve Saunders used to be one of his aides. And whenever there was a hearing, he would pop in, even though it had nothing to do with what he was doing, and raise some questions about poor Mr. Sparrow, who was trying to keep hold of his technology here, his little--his little lamp. And for the longest time, Sparrow could not figure out, `Why is this man against me? You know, why is the senator from Oregon coming in on the side of the Japanese?' He couldn't figure it out.
LAMB: So he's just being--the--a former Packwood aide was being paid by Mitsubishi to represent...
Mr. FIALKA: Right.
LAMB: ...the Mitsubishi peo--well, let me read just one...
Mr. FIALKA: Yeah.
LAMB: ...quote in here. Quote, "We do live in a dream state. It's a state of hope." No, that's not what I want to read. Here it is. Quote, "Nobody in his right mind ever talked to Bob Packwood about business when he was drinking because you'd have to go over it all o--you'd have to go over it all--you'd have to go over it all over again." And when I looked at your footnote on that, that came from the ethics hearings over here?
Mr. FIALKA: Yes, right.
LAMB: The material?
Mr. FIALKA: Right.
LAMB: How much did you--how much were you able to piece together this story about the Japanese influence over Senator Packwood through that particular case?
Mr. FIALKA: A good bit of it, because it's spelled out in there, although the story of Herb Sparrow and fusion is sort of just alluded to. It's in the corners of this saga of the senator who was brought down by his drinking problems and his womanizing. But parts of the story turn on--on the players in--in Herb Sparrow's story. And Saunders will not talk for the record, but he did talk to the investigators, and that's how I know how he was able to do this.
LAMB: But you also say that there was an attempted payoff for Mrs. Packwood, who--the divorced Mrs. Packwood for a job in this whole--in the middle of all this?
Mr. FIALKA: I'm--I'm not sure that ever came to fruition, but one--one of the things that Senator Packwood--the then-Senator Packwood--wanted was something that would get his wife's alimony off his back, and one of them would be a job that would support her. And so Saunders had an antique company, and there was talk about her working for that. I think this was left up in the air, but it's the kind of quid pro quo that could never occur in Japan the way it does here because an outsider simply can't come into Japan and play the kind of ball that was being played here.
LAMB: You, at one point--there's just one mention of India, and it's not positive; it's negative--saying that they are--I don't know. You characterize what you learned about India and the way they play this game.
Mr. FIALKA: Well, India is a--a case where the--the Internet, which is another US government in--invention that is now being used all over the world, can be used to steal our software in--in the twinkling of an eye.
LAMB: Can you give us an example?
Mr. FIALKA: Well, they--they have a--a large supply of very skilled software engineers who can do work at a tiny fraction of what it costs to do software work over here. And so a lot of it goes over to India, where it's done in, I guess, software sweatshops and then come back--comes back over here as finished product. And as in the case of China, some of it's copied illegally; it gets sold illegally. It's a big problem for software sellers in this country who risk billions developing this stuff and then it just goes--poof! And the question how you--how you get companies--in the case of India, it's not just software; it's also drugs--how you get some of our friends in the world to respect intellectual property rights is a very key question for us, because that's what we sell.
LAMB: At--at the worst case, you--you keep saying in the book that Americans are naive, they're--they're open, they're trusting and all that, and that we're getting--we're getting taken on this whole thing.
Mr. FIALKA: Yeah, and I don't want to lose some of that. I mean, I enjoy our openness, and it's a very yeasty culture to be in and it's a rich culture. And--and I don't want to see people lock the doors the way they do in--in some countries. And it's a matter of--of learning to defend ourselves, of--of learning to get as much as we give away and of kind of fighting for the value of our ideas because, hey, we've cut down all our forests; we've mined a lot of our natural resources. Ideas are what we have left to sell to the world.
LAMB: How long have you been a reporter?
Mr. FIALKA: Off and on since 1967.
LAMB: Where was home originally?
Mr. FIALKA: I come from Cedar Rapids, Iowa. I was educated as a--a lawyer, went to Georgetown University here--l--the law school. And then I had a reverse learning curve in law school; the more I learned about it, the less I wanted to do it. So at the end of law school, I graduated and then went to--went to work for The Baltimore Sun, and from there on to the Washington Star and, when that folded, to The Wall Street Journal. And I have rarely looked back. I--this is an exciting field for me.
LAMB: What year did you go to work for The Wall Street Journal?
Mr. FIALKA: 1981.
LAMB: What's your beat?
Mr. FIALKA: I've covered a variety of things for The Journal. I've been an investigative reporter; I've done special projects; I've covered the Pentagon and intelligence at the time this--this book idea came up. And now I cover energy and the environment, which is an area of great interest to The Journal.
LAMB: You mention in here that the Freedom of Information Act has helped foreigners find out a lot more about us than we can find out about them.
Mr. FIALKA: As a--as a journalist, I always thought the--the Freedom of Information Act was my friend. It was largely passed by lobbying from journalists in the sense that there were a lot of government files that we had a right to look into, and this set up a process, of sorts, to--to do that. If you look at who's using FOIA, as we call it, the Freedom of Information Act, about 5 percent of it is--is the media. The other 95 percent of it is businesses who are using it to spy on competitors, and a lot of that is--are foreign businesses coming in here, either doing it directly or through the intermediary of a--of a--of a--of a law firm--simply looking at what US companies file with their government because, in a lot of cases, they file way too much, and they begin to tell some of the--the secrets--the processes that they use. And--and to--especially to an Asian mind, that's simply gold.
LAMB: And when you've--you know, for those who've never done a book like this, when you set out to do it, what would you say were your tools to get the stories and the background information?
Mr. FIALKA: The--the--at the start of--of this book, it was like a pile of spaghetti. There were all these trails i--intertwined with each other, and you had to find the public documents that--that spelled them out. In the case of the--the--the Mitsubishi case involving Senator Packwood, they'd just done a very nice investigation about the size of the New York phone directory, which I found to be a great help to me, because there were people talking in there that I could never get to talk to me.

The courts were a vast disappointment because these cases--economic espionage cases don't end up in court. They're usually--usually, it is so embarrassing to the victim that he'd rather not bring the case at all, that he'd simply say, `OK. I've learned my lesson. I've lost $1 billion worth of technology. So be it.' Other companies do go into court, and a lot of times, those cases are pled so that there--there are no court documents.

And it made it especially difficult to--to write this book because I had assumed there'd be more in the courts than there is. It simply is a--is a trail that falls apart largely because our--number one, the victims don't want to talk about it; it's embarrassing. I mean, how do you go to your board of directors with a straight face and say, `Gentlemen, we've just lost our family secret because a group of Dutch teen-age hackers got into our computer and destroyed all our data files'? I mean, would you rather tell the board of directors that or would you rather just shut up about it? And it's the latter course that a lot of companies take?
LAMB: Your last chapter, Winning--who's John Boyd?
Mr. FIALKA: John Boyd is--I guess he's our chief military strategist. He's a retired Air Force colonel. He lives in--in Florida. He's a--was a huge influence on our activity in the Gulf War. He's the inventor of a theory that some people called …loops. I won't bore you with the details, but it's--it's simply a theory of outmaneuvering your enemy by reacting more quickly than he can. Boyd was a fighter pilot in the Korean War, and he saw that fighters who were smart and could maneuver and outthink the enemy lived and those who couldn't died.

And that's the way he sees business, and that's the way a lot of people have translated his theory into business theory. I mean, we often think as Americans of the level playing field, that business is a game, that somehow if the rules are the same on either side, we're going to win or at least have a sporting chance. Well, in a lot of cases in business, there is no sporting chance; losers simply die--corporations go into the ground like fighter planes. And that's why winning is essential and that's why, at least in--in America's case, I think Boyd's theory has some merit, which is, we're not ever going to defend it the way some people say, just by closing the United States up, but if we can outthink and outmaneuver the enemy and keep what we have and maybe get some from him, we can win at this. And that's--that's the hope of the book.
LAMB: He's quoted as saying, `"We're so (expletive) arrogant," he rasped. "In the end in Vietnam, we had to leave. If we're going to compete against Japan, we're going to have to understand the enemy's culture and not just mirror image him. They come over here by working in our culture. They've got one-sided advantage over us. That's the game we're playing, and it's a very interesting game. I might add, they'll suck us dry, but whose fault is it? Is it their fault or ours? It's our fault."'
Mr. FIALKA: Well, you can look at it another way. I mean, they send 50,000 students to this country a year to analyze our culture and we send about 4,000 to Japan. Of those 4,000, I was told, or I--I discovered, about half of them are taught courses in Japan but they're taught in English. I mean, why should they bother learning Japanese? So we give away the store. We--we--we would never wage any other contest like that, and economics is not a small contest. When--when we lose, we lose greatly. And so I used Boyd in the book to kind of appeal to our sense of competitiveness. We certainly have it; we are very competitive, but not in this arena.
LAMB: You've got about--if I remember, about 17 chapters in here.
Mr. FIALKA: Yes.
LAMB: We--time's about up. But of all the stories in here, which one's your favorite?
Mr. FIALKA: I guess my favorite is the French. I keep thinking that I might be able to sell a musical comedy based on that chapter, because...
LAMB: The Houston Trash Man?
Mr. FIALKA: Well, it starts with the--it starts before The Houston Trash Man. It starts with a--a man with the imposing name of P.L. Tiro DeJoli, who was a French ambassador here at the time of the Cuban missile crisis and a great fan of America. He was a man who grew up in the--in the French underground against the Nazis. He was a real spy, as opposed to a lot of spies who are simply bureaucrats or retreaded army colonels. And he--when he got over here, Kennedy told de Gaulle, `I'm sorry. We're not going to give you any of our hydrogen bomb secrets.' And de Gaulle said, `That's it.' You know, `No more Mr. Nice Guy. Call our ambassador in--in Washington and tell them, P.L., you're to spy on the United States and steal all of their science and technology secrets.'

And DeVostroli, who later became famous as the writer of a novel called "Topaz," defected to the United States after he--he had believed that if he defected over here and stayed in public, they were going to come over and kill him. So he defected to Mexico and later came back here and, I believe, finished out his years in Florida; he may still be alive.

But it began wh--what I call a 30-years war between French intelligence agencies and US intelligence agencies, which included episodes where they sent budding young engineers over here to do internships at--in US companies instead of being drafted. And they were paid by the--the French intelligence for that. And there's some evidence that the French intelligence service actually s--sold some of the secrets they learned to French companies. And so there's been a long series of back and forth, a lot of it quite clumsy, between the French and the--the US in this area. But if you ask the--the French experts and you ask the US experts whether we're any good at this, no, when it comes to economic espionage, it's the Russians and the Asians who are first-rate. We and the French are sort of the Keystone Kops.
LAMB: We're out of time, by the--out of time, but Deborah is who this book's devoted to. Who's that?
Mr. FIALKA: She's my wife.
LAMB: And here's what the cover looks like. "War by Other Means: Espio--Economic Espionage in America" by John Fialka. Thank you very much.


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